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Buying Gas: Not for Faint-of-Heart; IOUs, Regulators Grapple

Three utility gas buyers and a medium-sized California food processor swapped stories about planning and buying natural gas supplies, and the moral to their collective tales is: "it ain't easy" from either sector. They made their comments as part of the final panel at the two-day LDC Forum: Rockies & West conference in Los Angeles.

Recognizing that not everyone -- particularly state regulators -- has a complete understanding of the commodity markets and how volatility, hedges and futures curves can be good things, Jorg Steyskal, Puget Sound Energy's (PSE) portfolio hedging manager, said he briefs Washington state regulators regularly and if they don't outright reject his proposed hedging strategy, "we forge ahead."

With the primary goal being to wring out the volatility of buying energy and at the same time lower long-term costs, Steyskal said that the one thing regulators understand pretty well is "dollar-cost-averaging, and that if you hedge on a regular basis, you'll reduce the weighted-average cost of your hedging."

The other themes among Steyskal and his fellow panelists from Minnesota-based Xcel Energy, Portland, OR-based Northwest Natural Gas, and California-based Ruiz Food Products Inc., were the absence of real long-term deals, the reality of markets reacting to price signals, end-users' ability to use volatility to their advantage, the need for more storage.

PSE cannot do any long-term gas deals at the Canadian border any more, Steyskal said, with suppliers wanting everything to go through the AECO storage hub in Alberta. "We still can't get any long-term deals done," he said. "Hopefully, with some of the new entrants that come into [the Northwest] market -- institutions interested in getting physical hedges -- will have some insightful thoughts or structures that can result in some long-term contracts with utilities in the Pacific Northwest."

In the land-locked states where liquefied natural gas (LNG) imports are not an option, additional storage is the key, said Tim Carter, Xcel Energy gas supply director, who identified the Xcel operations in Colorado, Texas and Minnesota as all being candidates for more storage. "The difference between our baseload requirements in the winter and our peak-day is growing dramatically," Carter said."You need storage to be able to accommodate these swings, and on the power side, with the introduction of more wind and heavy reliance on gas-fired peaking generation, buying gas for those power plants is quite a challenge."

From the end-users' standpoint, Steve Windh, a vice president with Ruiz Good Products Inc., in California's agriculture-dominated central valley at Dinuba, indicated that since the state's energy crisis five years ago, his firm has paid close attention to its energy use and buying, but it is still only 5% of the company's production costs. "Energy costs are important, but they are not show-stoppers," he said.

Randy Friedman, Northwest Natural's gas buying director, injected the issue of the per-customer declining gas consumption for his utility, and what he thinks is also true for others in his region and across the nation. He cited the statistic that last year natural gas consumption (22 Tcf) was the same as what was burned in the United States in 1972. "The load is flat throughout the West, and it is going down on a per-customer basis for our utility and most every utility throughout the region, if not the country," Friedman said.

Even though Northwest Natural has 100,000 more customers than it had five years ago, Friedman said he is buying the same total volumes of gas annually now that he did back then. "It is because people really are responding to higher prices," he said. "If we start seeing a decline in customer growth, we are going to see a real decline in usage. We're not taking customer growth for granted in our company, and we're reintroducing marketing as a major issue."

Generally, Friedman is concerned with determining an ideal mix of counterparties in Northwest's gas trading, but other panelists seemed less concerned. All of the panelists hedged at least half their supplies at some time and Northwest Natural until only recently was hedging closer to 100%. None of the panelists are concerned in the short term that wholesale gas prices will be sustained at the $10 level or higher. "On a given day, prices may spike, but they won't be sustained at that level," Friedman said.

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